Why are more shoppers struggling to repay 'buy now, pay later' loans?
An April report from LendingTree said about four in ten users of buy now, pay later plans said they had made late payments in the past year, up from one in three last year. According to a May report from Bankrate, about one in four users of the loans chose them because they were easier to get than traditional credit cards.
The six largest BNPL providers — Affirm, Afterpay, Klarna, PayPal, Sezzle, and Zip — originated about 277.3 million loans for $33.8 billion in merchandise in 2022, or an amount equal to about 1% of credit card spending that year, according to the Consumer Financial Protection Bureau.
An industry that is coming under less regulatory scrutiny
The federal agency said this month it did not intend to enforce a Biden-era regulation that was designed to put more boundaries around the fintech lenders.
The rule treated buy now, pay later loans like traditional credit cards under the Truth In Lending Act, requiring disclosures, refund processing, a formal dispute process and other protections.
The regulation, which took effect last year, also prevented borrowers from being forced into automatic payments or charged with multiple fees for the same missed payment.
The Trump administration said its non-enforcement decision came “in the interest of focusing resources on supporting hard-working American taxpayers” and that it would “instead keep its enforcement and supervision resources focused on pressing threats to consumers, particularly servicemen and veterans.”
Consumer advocates maintain that without federal oversight, customers seeking refunds or in search of clear information about BNPL fee structures and interest rates will have less legal recourse.
There are risks to taking out installment loans
Industry watchers point to consumers taking out loans they can't afford to pay back as a top risk of BNPL use. Without credit bureaus keeping track of the new form of credit, there are fewer safeguards and less oversight.
Justine Farrell, chair of the marketing department at the University of San Diego’s Knauss School of Business, said that when consumers aren't able to make loan payments on time, it worsens the economic stress they're already experiencing.
“Consumers’ financial positions feel more spread thin than they have in a long time,” said Farrell, who studies consumer behavior and BNPL services. “The cost of food is continuing to go up, on top of rent and other goods ... so consumers are taking advantage of the ability to pay for items later."
The Consumer Federation of America and other watchdog organizations have expressed concern about the rollback of BNPL regulation as the use of the loans continues to rise.
“By taking a head-in-the-sand approach to the new universe of fintech loans, the new CFPB is once again favoring Big Tech at the expense of everyday people,” said Adam Rust, director of financial services at the Consumer Federation of America.
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The Associated Press receives support from Charles Schwab Foundation for educational and explanatory reporting to improve financial literacy. The independent foundation is separate from Charles Schwab and Co. Inc. The AP is solely responsible for its journalism.
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